The Shadow Open Market Committee, a group of mostly academic economists who monitor the policies of the U.S. central bank, Monday dismissed the threat of deflation, a damaging economy-wide drop in prices. The group is similarly unfazed by the fall in the dollar.
At its semi-annual meeting in Washington, the Shadow Open Market Committee said deflation fears are unfounded and misguided. It says with an expansionary monetary policy and a weakening currency, rather than deflation, the United States faces the prospect of moderately higher inflation. Gregory Hess of Claremont McKenna College says deflation may be a problem in Europe, but not in the United States.
"In essence deflation is a symptom and not a cause. Deflation is brought about by things like banking crises and, I won't call them collapses, but a certain implosion of the banking system, which we've seen historically earlier in the United States," he said. "But in no way do we see it now. It may actually be possible in some European countries."
Mr. Hess and his colleagues agree that Japan is caught in a deflationary spiral, but that it is very unlikely to occur in the United States.
Mickey Levy of the Bank of America says the Shadow Committee believes the U.S. economy is poised for resumed growth.
"If you look at the underlying fundamentals in the economy, along with continued monetary stimulus and the tail winds of previous tax cuts, there is every reason to believe that the economy is going to continue to register more improvement with the rate of growth improving moderately," he said.
The committee is unconcerned about the sharp declines in the exchange rate of the dollar. It says the dollar's value should be determined by the market. They say that neither the current Bush administration nor the Clinton administration before it intervened in the foreign exchange markets to alter the dollar's value. The Shadow committee says the dollar's weakness creates more problems for the weak European economy than it does for the United States.